With government and defense industry jobs helping to stave off job losses and economic woes affecting the rest of the nation, Washington, D.C., has maintained a relatively healthy real estate market. Taking a closer look at the area, Southeast Real Estate Business asked real estate leaders in the D.C. market to comment on the sectors of their expertise.

Office

The Washington, D.C., office market has strong real estate fundamentals and is the only major metropolitan city in the country with a single-digit vacancy rate. The District’s vacancy rate, now at 5.9 percent including sublease space, has increased minimally from the end of 2002. Nationally, the ongoing addition of sublease space to the local inventory is a major concern and continues to drive rental rates lower in those markets. However, in Washington, sublease space is a very manageable 26 percent of the available office space, down from 34 percent of the availability just 2 years ago.

Historically, tenant demand for Class A office space has driven the District’s statistical successes in real estate and in 2003, law firms continue to lead the way. Since the national real estate slowdown in 2001, this trend is even more evident in Washington. It’s really a tale of two cities as Class A office space prospers and Class B and C space, making up 41 percent of the city’s 107 million-square-foot inventory, continues its 2-year struggle. The Class B market has become a tenants’ market with base rents being reduced by up to $4 per square foot, to $29 to $36 per rentable square foot. Increased concession packages that include several months of rent abatement are also being offered. This is something that has been absent from District leases for 5 years.

Currently, the majority of new office development is taking place in Washington, D.C.’s central business district (22nd Street to 15th Street) and East End submarket (15th Street to 3rd Street), both between Massachusetts Avenue NW and Pennsylvania Avenue NW. Buildings in these areas will achieve the city’s highest rents and are most attractive to law firms and trade associations because of their amenity base and transportation access for employees. Tenants signing or negotiating leases in 2003 include:

w Winston & Strawn — in early 2005, this firm will occupy 154,000 square feet at 1700 K St. NW, a 390,000-square-foot building designed by architecture firm Pei, Cobb, Freed & Partners;

w Powell, Goldstein, Frazier & Murphy — this is the third law firm to sign at 901 New York Ave. NW. The firm will occupy 90,000 square feet and bring the building to 82 percent leased. Powell, Goldstein will join Finnegan Henderson Farabow Garrett & Dunner and Shea & Gardner at Boston Properties’ 537,000-square-foot building that will deliver in fourth quarter 2004;

• Kilpatrick & Lockhart — in early 2005, this firm will move from Dupont Circle to 110,000 square feet at 1601 K St. NW, a 215,000-square-foot development of The JBG Companies;

• Wilmer Cutler & Pickering — in probably one of the city’s most complex leases, this firm will occupy more than 500,000 square feet of the entire north side of the 1800 block of Pennsylvania Avenue in a combination of existing and new construction; and

• Dickstein, Shapiro, Morin & Oshinsky — this firm will move into more than 400,000 square feet at International Square, owned by CarrAmerica Realty Corporation, in early 2006 and leave behind a 360,000-square-foot redevelopment project by Vornado at 2101 L St.

Washington, D.C., will continue to expand its building inventory with slow, steady and controlled growth. Demand for Class A and trophy space is still high and supply is limited, especially in the 2006 to 2007 timeframe. Trophy projects on the horizon in this time period, such as 1101 New York Ave. and 801 E St., with their world-class architects, large floor plates and locational advantages, will attract prominent users and likely achieve rents in the mid-$60 per square foot range, record rents for law firms in Washington, D.C.

— Randall Lennon is senior vice president with CB Richard Ellis in Washington, D.C.

The Real Multifamily Story in D.C.

Condos

Unlike in most past years, the real story in the Washington region as far as multifamily development is concerned is condominium development — new projects are more abundant than ever and demand appears to be insatiable. In fact, the biggest buzz about apartment projects is which ones may be converted to condominium projects.

In Washington, D.C., condominium projects are selling out and pre-selling at record pace and prices, revitalizing areas that have struggled for years and thriving in well-established areas. Areas of note include:

• The 14th Street/Logan Circle area and the U Street corridor: Metropolis Development’s trendy Langston Lofts and Lofts 14 projects, offering more than 150 units, began construction earlier this year. Both projects were nearly 100 percent pre-sold before ground breaking, with more than 500 buyers on the waiting list. Metropolis is already planning for its next 14th Street project to begin later this year.

• Takoma Park: New Legacy Partners’ Cedar Crossing at Takoma Metro is beginning construction with more than 50 percent of its units pre-sold.

• Georgetown/West End: EastBanc’s 3033 Water St. project is more than 50 percent pre-sold at prices often exceeding $600 per square foot. Trammell Crow Company is beginning its 220-unit historic rehab and new construction project at Columbia Hospital later this year, which is garnering major interest before the marketing effort has even begun.

Talk of a bubble in the condominium development market is generally un-informed; Cushman & Wakefield estimates there are only 100 units delivering this year in the entire city that are not pre-sold, and just over 700 units delivering in 2004 that are not pre-sold. In fact, units that are pre-selling for 18 months in the future are left with hundreds of names of would-be buyers. Conversions of apartment projects to condominiums could definitely impact the market somewhat, but most of the potential conversions would place condominium units on the market later this year, at a time when supply of existing units will be nearly zero. While rising interest rates will undoubtedly stem the rise of per square foot prices, and perhaps slow sell-out paces to more normal levels, the market does not appear to be in danger of oversupply. Moreover, rising rates generally signal a recovering economy, which suggests greater job growth and demand for housing, which should act to compensate for the higher cost of borrowing.

— David Webb is senior director, financial services with Cushman & Wakefield in Washington, D.C.

Apartments

In the multifamily sector, everyone wants to be in Washington, D.C. The metro area’s job base, consisting of the recession-resistant government sector mixed with a resilient blend of professional services, healthcare, education, retail and construction, has enabled the region to lead all major metropolitan areas with the nation’s lowest unemployment rate. Even with the loss of jobs in the tech and telecom areas, Washington still shows its stripes with an unemployment rate of less than 3.5 percent and more than 30,000 new jobs expected for 2003.

The capital sources most successful in purchasing multifamily assets in Washington remain a mix of public and private money. As is typical with the focus of many real estate investment trusts recycling their funds into first-tier markets, numerous firms including Equity, Archstone-Smith, Summit, Town and Country, Home Properties and Fairfield have purchased in the region during the last 12 months. Private investors and their ability to finance with aggressive debt at record low interest rates have not been outdone. Stellar Management, The Stephen Goldberg Company, SSR and Ross Development & Investment also have acquired in the region. Lastly, the trend of condo conversions is coming on strong with multiple national converters (including Crescent Heights) now looking for opportunities in this area of high-priced, single-family alternatives.

The result is pricing that is achieving record per-unit results. Look for “A” quality product to be sold for $170,000 or more per unit with “B” quality properties bringing, in some cases, more than $120,000 per unit. This competitive environment is driving cap rates to levels in the low 6s to mid-7 range. Even though there are more properties on the market now than usual and interest rates have begun to rise, look for the trend to continue to be aggressive as the market dynamics still dictate strong investment.

— Drew White is director of The Apartment Group of Cushman & Wakefield in Washington, D.C.


©2003 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.